King Says BOE Faces Hard Choice as Euro Area Storm Rages (Update 2)

Bank of England Governor Mervyn King said officials have prepared for dangers posed by Europe’s debt crisis, after the bank lowered growth forecasts and raised predictions for inflation this year. “Contingency plans have been discussed and have been for a considerable time,” King said at a press conference to present the bank’s quarterly Inflation Report today in London. “We are navigating through turbulent waters with the risk of a storm heading our way from the continent.” Inflation will be about 1.6 percent in two years after staying above the 2 percent target for longer than it predicted in February, the central bank’s forecasts show. Officials also said that U.K. growth is likely to remain “subdued” in the near term, held back by the government’s fiscal squeeze, the pace of the global economy and tight credit conditions. Policy makers voted to halt expansion of stimulus last week after some officials stepped up their rhetoric on inflation, which has been above their goal for more than two years. King said today that there’s a case both to expand bond purchases or to hold fewer securities and that the risks to inflation are “broadly, evenly balanced.” “The asset purchases we made between October and last month will continue to stimulate the economy for some time to come,” King said. “The fact we’ve not continued the program at this stage doesn’t mean to say the effect doesn’t continue to pass through the economy -- it does -- and the option is still open to us also.” Financial Crisis Ten-year gilts extended their advance after the release of the inflation report. The yield fell five basis points to 1.855 percent as of 11:39 a.m. in London. The pound fell 0.4 percent today and traded at $1.5925. The central bank held its key rate at a record low of 0.5 percent on May 10 and kept its bond-purchase target at 325 billion pounds ($517 billion). Officials said today that despite the changes in the near-term outlook, “the fundamental policy challenges” after the financial crisis and recession have stayed the same. “There are major problems ahead,” King said. “There are major credit losses to be realized. Whatever happens there will be difficulties ahead that will undoubtedly affect us” and “it is not sensible to think solely in terms of ‘euro stays together -- excellent. Euro comes apart -- disaster,’” he said. In the euro area, Greece is headed for new elections after the inconclusive May 6 vote pushed Syriza, which opposes the nation’s international bailout, into second place and reignited concern that the country will renege on pledges to cut spending.